How Restructuring Your Accounts Receivable Can Increase Your Cash Flow
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Have you ever sweated whether you could make payroll or pay your suppliers? Felt confused because even though you had plenty of business, your numbers got tight toward the end of the month? If you said yes to either of these questions. You might have a cash flow problem.
When we hear about these types of issues with our clients, we go directly to Accounts Receivable. We’ve found that a systematic approach to billing is one way to address cash flow issues.
What is an Accounts Receivable System?
Accounts Receivable in simple terms means the amount of money owed to a business by its clients based on services or products that they’ve already purchased. An Accounts Receivable System is a strategic set of processes that helps expedite effective and timely billing. While every business has billing, most businesses are not thinking strategically about how their Accounts Receivable timelines impact their cash flow.
How Does Account Receivable Affect My Cash Flow?
One of the key factors for effective accounts receivable management is billing in a timely manner. It’s crucial for businesses to send out invoices promptly and consistently. We know that managing the books can feel like a pain, but when you procrastinate it has a direct impact on your company's bottom line.
Have you ever considered what day you send out your billing? Do you know what impact it has on your cash flow? Your clients probably have thirty days to pay their invoices depending on your payment terms. Most companies process payment for billing on the 10th and the 25th of every month. If you send your bill on the 5th, that means that your payment wouldn’t be processed until the second batch payment on the 25th which might not get to your bank account until the following month.
This gap between billing and payment means that businesses run into cash flow problems particularly with payroll when they are waiting for payment from clients. Many companies end up drawing on lines of credit that often have fees and interest which decreases the companies overall profitability. When you’re more strategic about when you bill, you have the opportunity to increase your cash flow.
We want to help you reduce the payroll gap and maintain a steady influx of cash into your business. We know that when you have a strategic approach to Accounts Receivable you ultimately have more control over financial planning, increased access to working capital, and (our favorite!) improved profitability.
How to Improve Your Accounts Receivable Systems
To optimize your accounts receivable process, it's essential to implement a few effective strategies. First, you want to establish clear payment terms and communicate them to your customers so everyone is on the same page. This includes specifying payment due dates, late payment penalties, and acceptable payment methods.
Another strategy is to regularly review and analyze your accounts receivable aging report. This report provides insights into the outstanding invoices and allows you to prioritize collection efforts based on their aging. Finally, establishing strong relationships with your customers and addressing any payment issues promptly can help prevent delays and improve overall payment behavior.
Here are a few of our favorite ways to improve our clients accounts receivable systems:
Bill Promptly: By promptly invoicing your customers, you improve the chances of receiving payments on time, thus boosting your cash flow. Additionally, timely billing demonstrates professionalism and enhances customer satisfaction, as it shows that you value their business.
Charge Up Front: Where possible, we recommend that you charge up front for your products and services. This way you are paid prior to sending out your product, paying your employees, or providing your services.
Bill Weekly Instead of Monthly: Billing weekly allows you to be paid several times during the month which increases the amount of fluid cash that you have on hand.
Send Bills on the 1st of Every Month: Since many companies process payment for billing on the 10th and the 25th of every month, billing on the 1st helps you make sure that you get paid during the first batch payment of the month.
Incentivize Early Payments: Offer incentives for early payment to encourage your customers to settle their invoices promptly.
Set up Automated Payments: Allowing your clients to pay via ACH or by credit card helps you receive payment more quickly then receiving a check by mail.
Common Challenges With Accounts Receivable
There are numerous tools and software available to streamline and automate the accounts receivable process. These tools can help businesses track and manage invoices, send automated reminders to customers, and generate insightful reports. Our favorite accounts receivable management software is QuickBooks. But it really only works if you customize it for your business. We recommend features like invoice customization, automated payment reminders, and integration with other financial systems.
Managing accounts receivable does pose certain challenges. One challenge is late or non-payment by customers. This can be due to various reasons such as financial difficulties, disputes over goods or services, or simple oversight.
Another challenge is inaccurate or incomplete customer information, which can lead to delays in invoicing and collection efforts. Additionally, ineffective communication and lack of follow-up can hinder the accounts receivable process. By being proactive in addressing these challenges, businesses can minimize their impact on cash flow and maintain healthy customer relationships.
Little Known Facts about Accounts Receivable
While accounts receivable may seem straightforward, there are few lesser-known facts that are worth considering. First, accounts receivable is considered an asset on a company's balance sheet, as it represents money owed to the business. Secondly, the average collection period is a metric used to measure the efficiency of accounts receivable management. It calculates the average number of days it takes for a business to collect payment after a sale has been made which can have an impact on the valuing of your business. Lastly, accounts receivable can be sold to third-party companies known as factoring companies, who then assume the responsibility of collecting the outstanding invoices for a fee.
Effective management of accounts receivable is crucial for maintaining a healthy cash flow and eliminating your cash flow gaps. Timely billing, understanding the impact of accounts receivable on cash flow, and implementing strategies for improvement are key factors in optimizing this process. Remember, accounts receivable is not just about invoices and payments; it’s about building and maintaining relationships with your customers. So, leverage technology, embrace best practices, and maximize your cash flow through a strategic accounts receivable system.
Hire A Pro
Are you ready to optimize your accounts receivable process? We know that setting up a strategic Accounts Receivable system can be intimidating, but it doesn’t have to be. At Oracle Profitability, we can streamline your accounts receivable management systems and boost your cash flow! Contact us today for a free consultation.
Check out our other blogs on Smart Systems for Profitability.